Born in Berlin, Stein grew up in an era defined by the Nazis. His father Herbert Stein was factory director of Alfred Teves, a motorcycle manufacturing firm that the Nazi regime employed to make automotive parts. Herbert was in charge of 250,000 forced laborers. He was also involved in the Confessing Church, a resistance group.

Stein has said that these events had a profound effect on his life. After the war, his father was sentenced to two years of forced labor for collaborating with the Nazis. Peter's academic performance nose-dived and he barely made it into Frankfurt University. He then moved to Munich and enrolled at university there, pursuing a PhD thesis on the works of E. T. A. Hoffmann.